Israel Balks At Palestinian Unity Deal04:23

The government of Israeli Prime Minister Benjamin Netanyahu, seen here during a Cabinet meeting on May 1, says it will withhold the transfer of $90 million in tax funds and customs fees for the Palestinian Authority. The move comes after news of a reconciliation deal between two key rival Palestinian factions.

Israel is taking a tough line against a reconciliation deal between two rival Palestinian factions.

A unity agreement is set to be signed Wednesday in Cairo by Fatah, which controls the Palestinian Authority, and Hamas, a hard-line Islamist group that rules the Gaza Strip. The agreement would help end a bitter four-year divide between the two groups. But Israel considers Hamas a terrorist organization and is leveling punitive actions against the Palestinian government for agreeing to the deal.

The Israeli government wasted no time in denouncing the agreement when it was announced last week. Israeli Prime Minister Benjamin Netanyahu told the Palestinian government it would have to choose whether it wants peace with Israel or with Hamas.

Since then, Netanyahu's government has been ratcheting up both its rhetoric and its actions to undermine the reconciliation agreement. On Sunday, Israel announced it would withhold the transfer of more than $90 million in tax funds and customs fees for the Palestinian Authority, led by Mahmoud Abbas.

Surely no one could expect Israel to transfer money into the hands of a world-recognized terror organization such as Hamas, and it's up to the Palestinian government to decide what they want to do.

Yigal Palmor, Israel Foreign Ministry spokesman

Israeli Foreign Ministry spokesman Yigal Palmor says the Israeli government is worried the money will go to Hamas.

"Surely no one could expect Israel to transfer money into the hands of a world-recognized terror organization such as Hamas," Palmor says. "And it's up to the Palestinian government to decide what they want to do — whether they want to incorporate Hamas into government and then, of course, kiss goodbye all options for negotiations or try to choose the road of peace and negotiation, which is incompatible with Hamas."

A 'Very Irresponsible Approach'

The tax payments account for more than two-thirds of the Palestinian Authority's budget. They have been collected and transferred by Israel since the 1990s as part of interim peace deals.

Hanan Ashrawi, a member of the Palestinian Legislative Council, says these sorts of moves by the Israeli government are ridiculous. Ashrawi says uniting Palestinians is the only way to bring stability to the region and push forward the peace process.

Hanan Ashrawi, a member of the Palestinian Legislative Council, says that uniting Palestinians is the only way to bring stability to the region and push forward the peace process. Here, she listens during a session of the Palestinian Parliament on March 27, 2006. (AFP/Getty Images)

"If Netanyahu and the current Israeli leadership had any sense, which I doubt, then they would certainly have been encouraged by this development rather than attempting this very, very irresponsible, ignorant approach of divide and conquer and find excuses to avoid talking to the Palestinians," Ashrawi says.

Mustafa Barghouti, a longtime political activist who helped negotiate the reconciliation agreement, says he's also surprised by Israel's reaction.

"Mr. Netanyahu has been blaming Mr. Abbas for many months that Mr. Abbas cannot represent all Palestinians," Barghouti says. "Now, he can represent all Palestinians. So why they are upset, I don't understand."

A Good Political Move For Israel?

Hillel Frisch, senior researcher at the Begin-Sadat Center for Strategic Studies in Jerusalem, says the Palestinian reconciliation actually helps Netanyahu at a delicate diplomatic moment. There is growing support for a bid by the Palestinian government to win recognition of statehood at the United Nations General Assembly in September. Frisch says Abbas' decision to reconcile with Hamas could change things.

If Netanyahu and the current Israeli leadership had any sense, which I doubt, then they would certainly have been encouraged by this development rather than attempting this very, very irresponsible, ignorant approach of divide and conquer.

Hanan Ashrawi, member, Palestinian Legislative council

"The Israelis can turn to the international community and say, 'There's no partner. He's not playing by the rules of the game,' " Frisch says. "Politically I would say that Israel has gained by this move."

But Frisch says it's a different story on the security front. Egypt, which brokered the reconciliation deal, has indicated it will soon reopen the Rafah border crossing it shares with the Gaza Strip — the area controlled by Hamas.

Israel says this will help Hamas build up its weapons stocks. Palmor, the Foreign Ministry spokesman, says Israel would like to preserve the common interests of security and border arrangements with Egypt.

"There are many security challenges and threats across the border, and we need to keep the same level of cooperation that we've had in the past, in the interest of both countries," Palmor says.

Still, Palmor says Egypt is changing and Israel isn't sure what its new policies are.